Morgan Stanley has highlighted that the ongoing reduction in global chemical supply—irrespective of the presence of anti-involution measures—should underpin a sector recovery beginning in mid-2026.
According to the brokerage, China is seeing impacts from anti-involution policies, with multiple chemical producers shutting down operations amid rising production costs.
The firm assesses that global capacity growth for benzene and C2-C6 chains will see a compound annual growth rate (CAGR) of 2.0% between 2024 and 2028 in its bull case scenario, which assumes China shutters all facilities older than 20 years.
This compares to a 3.1% CAGR in its bear case scenario, where no Chinese plant closures occur. Morgan Stanley projects that the actual outcome will fall between these two scenarios, both notably below the 3.9% average global capacity expansion seen from 2020 to 2024.
Looking ahead, the sector’s earnings in the second half of 2025 are poised to gain modest support from a combination of seasonal factors and improved product margins off a low base, a dynamic expected to lend some resilience to share prices. Nevertheless, Morgan Stanley cautions that a more pronounced recovery hinges on the effective implementation of anti-involution strategies as well as evolving market demand.
The brokerage indicates that a sector rebound is projected for mid-2026, given that several scheduled chemical projects in China will come online during 2025. Projects slated beyond 2026, however, remain uncertain pending the finalisation of pipelines under China’s Five-Year Plan, which is anticipated to include further anti-involution provisions.
Beyond China, Morgan Stanley points to ongoing plant closures in the EU, Japan, and South Korea as significant contributors to tightening supply. The firm notes that more than 10% of capacity for products such as aramid fibers, TDI, and MMA will be withdrawn between 2022 and 2027. According to their analysis, these reductions are likely to increase price volatility, particularly in an environment where production is highly concentrated. Any unexpected supply interruptions or shifts in demand could lead to sharp, short-term price rallies.
On the investment front, Morgan Stanley has upgraded Wanhua in China to Overweight (OW). In Europe, its top pick is Akzo, with additional favourable outlooks on Syensqo, BASF, and AKE (all rated OW). The firm also expresses preference for LyondellBasell in the United States, as well as PTT Global Chemical (SET: PTTGC) and Petronas Chemicals across India and Southeast Asia.
